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Blockchain to Accelerate Transatlantic Trade

February 23, 2018

Among the many effects of Brexit is contemplating the staggering rise in the workload in UK customs run by Her Majesty’s Revenue and Customs (HMRC). As the UK leaves the EU on May 2019 and its transitional phase and future relationship with the EU unknown at this point, the UK will need to manage a 363 percent increase in customs declarations, from 55 million to 255 million – caused by the rise of items for which tax and duties must now be collected on trade between the UK and EU. HMRC is running against the clock to put in place a new high-tech Customs Declaration Service (CDS). While not a silver bullet given the tight timescales the UK and EU are working to for an immediate agreement, blockchain may help facilitate smoother customs processes in the medium to longer term. It is certainly an important area for consideration in looking at how technological innovation can reduce frictions and costs in the transatlantic trade relationship.

At a time when world trade is growing again and ecommerce has created a tsunami of small parcels crisscrossing international borders – trade in items less than $100 in value grew about ten times faster than world trade in 2011-15 – border agencies need to quickly sort out illicit shipments and fraudulent duty-avoidance, while enabling low-risk shipments to promptly pass through. Securing borders and facilitating trade cannot be done efficiently by hand or with human eye seeking to detect suspicious patterns; rather, the pattern recognition is perfect work for computers.

Savvier customs such as those of the United Kingdom, United States, and Singapore have long used sophisticated risk management techniques such as predictive analytics and machine learning in their work, with life-saving effects. In 2010, U.S. authorities identified a bomb inside a printer cartridge shipped from Yemen to Chicago. The discovery was made on the basis of trade data that showed that Yemen was an unusual provider of office supplies to the location destined in Chicago. Computers at Singapore Customs have spotted underpayment of duty for cigarettes through analytics that revealed the weight of the goods to be lower than the historical norm. Singapore Customs is now analyzing the potential for artificial intelligence to read and learn X-ray images of containers, in order to detect anomalies and alert customs officials to open suspicious items manually. In the UK, predictive analytics are expected to locate £7 billion in additional tax revenue that had been lost to fraud or errors.

But still there is slack. For example, data-sharing among the 28 UK border agencies has been inefficient, as their databases have not been fully connected.

Blockchain can take customs risk management to another level. Invented by one or a group of still-anonymous individuals who in 2014 published its seminal open source code, blockchain is quietly revolutionizing trade finance, supply chain management, and management of property rights, among many other things. It is a decentralized, disintermediated system that retains data on all transactions on ledger that is visible to all stakeholders and updated in real time. Each transaction on blockchain has an IP address attached to it, which enables anyone to view every transaction any given IP holder has ever made and with whom. All users remain private, and transactions are secure and carried out among private parties – but they are also visible from the bird’s eye view to all market participants. That each user builds an immutable history on the ledger, mitigates the need for third-party due diligence.

Blockchain’s properties are terrific for border clearance, to ensure high-quality, real-time data on shippers and on the authenticity and origin of goods, and that are sharable instantly with all border agencies. In 2017, HMRC announced a proof of concept using blockchain in customs. The system is to reduce administrative costs and delays in trade transactions, coordinate agencies’ inspections, and automatically detect anomalies and enable compliant shipments to clear customs fast – and thus ideally accelerate UK’s adjustment to the deluge of parcels and customs declarations post-Brexit.

Whether or not blockchain makes it to HMRC by Brexit, UK’s effort opens new opportunities to leverage blockchain also in transatlantic trade. In November 2017, U.S. Customs and Border Protection (CBP) announced it had ideated 14 use cases for blockchain, such as using blockchain to keep track of licenses, permits, certificate of origin reporting and free trade agreement product qualifications. The fact that both UK and U.S. sides are now moving to the cutting-edge technology can fuel transatlantic flows and data sharing among UK and U.S. customs. And ultimately with a number of other customs planning on blockchain. In January 2018, 15 countries in East Africa announced they are launching a “Digital FTA” that is a web of blockchain ledgers and enables easy generation of certificates of origin, for example.

What is more, there can be significant synergies between customs that adopt blockchain and the many trade intermediaries, such as shippers and banks, that have been aggressively piloting blockchain in the past couple of years to combat fraud and reduce paper and manual processes in global shipping and trade finance. Korea’s Customs is already sailing to leverage these synergies with a consortium of shippers. The governments of Hong Kong and Singapore are launching a blockchain experiment in trade finance with 20 banks in early 2019. Ultimately all parties – shippers, banks, customs and border agencies involved in a trade transaction can be on the same blockchain, with full visibility into any one shipment end-to-end. This is a major opportunity for transatlantic and world trade, and none too soon for the United Kingdom.